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The interviews combined the benefits of both unstructured and structured
techniques. For the most part, the interviews were unstructured and notes
were edited and organized for the final report. The structured portion of the
interviews consisted of two questionnaires to which most interviewees were
asked to respond; one questionnaire asked foreign portfolio managers to assess
the relative importance of 15 different factors influencing foreign portfolio in
vestment (see Section III); the second questionnaire assessed the relative
importance of 8 considerations affecting the choice of a U.S. broker or other
intermediary (see Section V).
The most notable characteristic of foreign portfolio investment in the U.S.
is its relatively recent rapid growth. From the end of World War II until 1957,
there was very little foreign portfolio investment activity in the U.S. because
of the tremendous post-war need for internal capital, and the consequent exchange
controls that limited investment abroad by residents of most major countries.
However, as exchange controls were eased and savings began to accumulate,
mutual funds sold in Europe but invested in U.S. securities gained a foothold.
U.S. brokers claim that the first substantial movement of portfolio capital
into the U.S. since World War II began in the early 1960's. From 1955-1965,
See text of questionnaires in Appendix A.
various tax treaties were signed which reduced U.S. taxes on interest and
dividends for foreign investors in many countries; this may have led to in
creased portfolio investment flows from those countries that had no offsetting
In 1968, net foreign investment in U.S. securities was sizable for the first
time since World War II. Typically, foreign investment strategies were said
to be similar to those prevailing in the U.S. at that time; i.e., highly per
formance-oriented. The market drop of 1969-70 stemmed the flood. In addition,
while technically not involving a U.S. mutual fund, the 10S/Cornfeld debacle
brought U.S. mutual fund business overseas to a standstill.
Many financiers believe the devaluations of the dollar, first in 1971, and
again in 1973, had a dramatic impact on the attitudes of foreign investors.
Some foreign investors, for example, claim to have slowed or reversed invest
ment flows to the U.S. in anticipation of devaluations. More recently (especially
during 1975) they claim to have increased their level of investing in the U.S.
to take advantage of "bargains" on the assumption that the U.S. dollar had
dropped too far and would soon recover. (Of course, these comments are
subjective and not readily susceptible to quantification. For complete analysis
of the subject in terms of both gross and net investment, one would also have
to compare foreign actions with those taken by U.S. investors during the
For the period 1969-1974, foreign investors' net purchases of U.S. stocks
averaged approximately $1.5 billion per year, reaching a peak of $2.8 billion
in 1973. After a sharp drop in the bear market of 1974, this figure soared to
$ 4.4 billion in 1975. At the same time foreign portfolio managers have been
investing heavily in the U.S., there has been a simultaneous flow of U.S.
money into foreign assets, mainly in the form of direct investment and purchases
of foreign and international bond issues. Those interviewed believed that the
dramatic increase in foreign investment has been due in part to the belief that
the world is entering a period of comparative stability in international currencies.
Other factors cited include the relative degree of political stability, lower in
flation rates, and the long-term growth prospects of the free world's security
Roughly a third of the total portfolio investment opportunity in the free world
is outside the U.S.; two-thirds is inside. Clearly, the portfolio managers of the
world, both foreign and domestic, have the power to shift many billions of
portfolio capital either into or out of the U.S. The remainder of this report
reviews their objectives as well as the procedures followed, the constraints
imposed, and other important influences on the process of foreign portfolio
investment in the U.S.
International portfolio managers behave differently from one country to the
next. In some cases, such differences are mandated by law; in other cases,
the differences simply reflect different historical backgrounds, cultural dif
ferences, and attitudinal differences. Figure 1 summarizes the most relevant
features of those countries responsible for a large percentage of total foreign
portfolio capital flows into the U.S.
The summary suggests two points that
underlie this entire subject.
Portfolio capital enters the U.S. for different reasons and in
varying amounts because of fundamental differences between
the most significant characteristics are changing all
the time; sometimes quite abruptly and visibly as in the case
of laws pertaining to currency controls and exchange rates;
sometimes slowly and imperceptibly as in the case of
This section highlights the most significant of these factors. As mentioned
previously, the results of this study are based primarily upon interviews
in the fall of 1975 with financiers throughout the free world. In other words,
Very limited variety of local issues from which to choose.
A limited variety of domestic corporations in which to invest.
Closeness to U.S., in terms of distance, language and culture dominates interational investment picture.
Limitations on foreign investment imposed largely by strong central government,
MIDDLE EAST OIL PRODUCING COUNTRIES (As viewed by U.S. and European intermedicries)
Wealth of major families ranges from $50-$500 million each.
Has a wide selection of investment opportunities.
An almost totally open economy. Government acts as advisor to financial
The Swiss banks are the largest en trepôt for international portfolio funds.
Strict controls imposed on ou tward investments. Very little local management of investments in foreign countries; U.S. and Swiss intermediaries are used extensively.
The British have been investing overseas for hundreds of years; they have excellent
After World War II, the U.S. "fashioned the Japanese financial system after our